Making Tax Digital for Income Tax: Your Complete Guide for Creative Freelancers

What Is Making Tax Digital for Income Tax?

Making Tax Digital for Income Tax (MTD IT) represents a fundamental shift in how creative freelancers will manage their tax obligations in the UK. This government initiative is part of HMRC's broader digital transformation programme aimed at modernising the tax system and reducing the £5 billion tax gap.

Unlike the traditional annual Self Assessment process, MTD IT requires eligible freelancers to maintain digital records of their income and expenses throughout the year and submit quarterly updates to HMRC using compatible software. This move away from paper-based record keeping and annual submissions means you'll have a more real-time view of your tax position.

Who Needs to Comply and When?

Income Thresholds and Timeline

MTD IT is being introduced in phases based on your annual gross income from self-employment:

Phase 1 (April 2026): Freelancers earning over £50,000 annually must comply

Phase 2 (April 2027): Threshold drops to over £30,000 annually

Phase 3 (April 2028): Final threshold of over £20,000 annually

Your "qualifying income" includes all gross earnings from your creative work before deducting expenses or taxes - whether that's from freelance design, photography, writing, music, content creation or any other creative services.

What Creative Work Is Included?

If you earn income from any of these creative activities, MTD IT rules will likely apply to you:

• Freelance design, writing, or photography
• Music gigs, streaming royalties, or performances
• YouTube, Patreon, TikTok, or other content creation
• Selling art, crafts, or digital products
• Illustration, animation, or video production
• Consulting or creative services

Key Changes Under MTD IT

1. Digital Record Keeping Requirements

Gone are the days of shoebox receipts and handwritten cashbooks. Under MTD, you must:

• Use HMRC-recognised accounting software to maintain digital records
• Record each transaction with date, amount, and category
• Keep digital copies of invoices, receipts, and supporting documents
• Maintain records for at least 5 years after the submission deadline

Important: Basic spreadsheets like Excel, Sheets or Numbers can meet MTD requirements - but you need software that can digitally connect them to HMRC's systems.

2. Quarterly Reporting Instead of Annual Returns

The biggest change is moving from one annual Self Assessment to four quarterly updates throughout the tax year:

Quarterly deadlines typically fall in:

• August (for April-June period)
• November (for July-September period)
• February (for October-December period)
• May (for January-March period)

Each quarterly submission summarises your income and expenses for that period. These are cumulative, meaning you can correct any errors from previous quarters in your next submission.

3. Final Declaration Process

At the end of the tax year, instead of a traditional Self Assessment, you'll submit:

• Final Declaration: Confirming your business income and expenses plus all other income sources and personal allowances
• Tax payment: Still due by 31 January and 31 July, if making payments on account, same as current system

Software Options for Creative Freelancers

Choosing the right software is crucial for MTD compliance. You have several options:

Full MTD-Compatible Software

These provide complete record-keeping and submission capabilities:

Popular options include:

• Xero: Robust cloud-based solution and one of our favourites
• FreeAgent: User-friendly option, free for many NatWest, RBS and Mettle customers
• QuickBooks Online: Popular amongst accountants with comprehensive features
• Sage: Long-established traditional accounting software with MTD capability

Bridging Software

If you prefer to keep using spreadsheets or non-compatible software, bridging software can connect your existing records to HMRC:

• TaxCalc: Highly trusted solution used by over 11,000 accountancy firms
• SE_reports: Potentially free bridging option
• 123 Sheets: Alternative spreadsheet solution

Considerations for Creative Freelancers

When choosing software, consider:

• Ease of use: Many creatives aren't accounting experts
• Mobile capabilities: For recording expenses on the go
• Integration: With payment processors, banks, and other business tools
• Cost: From free options to premium solutions
• Support: Customer service and training resources

Penalties and Compliance

MTD introduces a new points-based penalty system that's more forgiving for occasional mistakes but stricter on persistent non-compliance.

Late Submission Penalties

• Quarterly filers: Accumulate penalty points for late submissions
• Four points trigger a £200 penalty
• Additional £200 for each subsequent late filing
• Points expire after 24 months if you stay below the threshold

Late Payment Penalties

• No penalty if tax paid within 15 days of due date
• 3% penalty on unpaid tax after day 15
• Additional penalties for continued late payment

During Testing Period

Some good news: Late submission penalties for quarterly updates don't apply during the 2024/25 and 2025/26 testing periods - only annual filing obligations.

Deductible Expenses for Creative Freelancers

Understanding what expenses you can claim is crucial for accurate record-keeping and reducing your tax bill.

Common Creative Business Expenses

Software and Digital Tools:

• Adobe Creative Suite subscriptions
• Design software and applications
• Website hosting and domain fees
• Cloud storage services
• Project management tools

Equipment and Supplies:

• Computers, tablets, cameras, and hardware
• Art supplies, instruments, and materials
• Office furniture and equipment
• Professional lighting or sound equipment

Professional Development:

• Creative courses and workshops
• Industry conference attendance
• Professional memberships and subscriptions
• Books, magazines, and educational materials

Business Operations:

• Home office costs (portion for business use)
• Internet and phone bills (business portion)
• Professional insurance
• Accounting and legal fees
• Marketing and advertising costs

Travel and Networking:

• Travel to client meetings or shoots
• Accommodation for business trips
• Networking events and business meals
• Transportation costs for business purposes

Preparing for MTD: Your Action Plan

Step 1: Assess Your Situation

• Calculate your annual gross income to determine when MTD applies to you
• Review your current record-keeping methods
• Identify what needs to change

Step 2: Choose and Implement Software

• Research MTD-compatible software options
• Consider your specific needs as a creative freelancer
• Set up the software and import existing data
• Connect your bank accounts for automatic transaction feeds

Step 3: Start Digital Record Keeping

• Begin recording all income and expenses digitally
• Scan and store paper receipts
• Categorise transactions properly
• Maintain regular bookkeeping habits

Step 4: Consider Professional Help

• Evaluate whether you need an accountant familiar with MTD
• Ensure any existing accountant is MTD-ready
• Consider training or support for the new system

Step 5: Test the System

• Consider volunteering for early MTD testing
• Practice quarterly submissions
• Familiarise yourself with the software and processes

Exemptions and Special Circumstances

Some freelancers may be exempt from MTD requirements:

Automatic Exemptions

• Trustees (including charitable trustees)
• Personal representatives of deceased persons
• Those without a National Insurance number
• Non-resident companies

Exemptions You Can Apply For

• Age, disability, or health: If digital record-keeping isn't practical due to your circumstances
• Location: Limited or no internet access
• Religious grounds: Beliefs incompatible with electronic record-keeping
• Other practical reasons: HMRC considers each case individually

If you already have an MTD for VAT exemption for these reasons, you won't need to apply again for income tax.

Benefits of Early Adoption

While MTD might seem daunting, early adoption offers several advantages:

Financial Benefits

• Better cash flow management: Real-time view of your financial position
• Easier tax planning: Quarterly reviews help avoid year-end surprises
• Reduced errors: Digital processes minimise calculation mistakes
• Tax estimate visibility: Get estimates of tax owed throughout the year

Business Benefits

• Improved record-keeping: More organised financial management
• Time savings: Reduced year-end administrative burden
• Professional credibility: Modern, efficient business practices
• Better business insights: Regular financial reviews aid decision-making

Getting Ready: Final Checklist

Before April 2026 (if earning over £50,000):

✓ Choose and set up MTD-compatible software
✓ Begin digital record-keeping immediately
✓ Connect bank accounts and set up automatic feeds
✓ Categorise all income and expense transactions properly
✓ Scan and digitally store existing paper records
✓ Test quarterly reporting processes
✓ Ensure you understand penalty rules and deadlines
✓ Consider professional accounting support if needed
✓ Register for MTD through your chosen software (not HMRC website)
✓ Set up calendar reminders for quarterly submission deadlines

Making Tax Digital for Income Tax represents a significant shift in how creative freelancers manage their tax obligations. While the change requires adaptation, early preparation and the right tools can make the transition smooth and even beneficial for your business. The key is starting your digital transformation now, well before the mandatory deadlines, to ensure you're confident and compliant when MTD becomes law.

Need help?

Why not book a meeting with us to discuss your circumstances and see how we can help.